CS Rahul Jain

B.Com., ACS, (LLB)

Partner

In our daily life, we enter into a series of contracts, even

without realising it
For example, when we enter into a public transport, a
restaurant, etc., we enter into a contract
Contract is an agreement, enforceable by law
[Section 2(h)]

But, every promise and every set of promises, forming

consideration for each other is NOT an agreement
[Section 2(e)]

Nature and Classification of Contracts

When the person, to whom the proposal is made,
signifies his assent thereto, the proposal is said to be
accepted. A proposal when accepted becomes a
promise. [Section 2(b)].
But, only such agreements constitute contracts, which
are:
(i) Enforceable in law, and are also
(ii) Intended to be so.

For example, Following types of agreements are not

contracts:
(a) Social agreements, like inviting some friend for dinner,
as these are not intended to be enforceable in law, and
(b) Contracts, specifically declared as void, ab initio.

Contracts, specifically declared as void, ab initio:

(i)

An agreement in restraint of trade [Section 27]

(ii)

An agreement to bet, or wagering contract

[Section 30]

(iii) An agreement to do an impossible act, like shifting

Taj Mahal from Agra to Delhi [Section 56]
(iv) An agreement to do any unlawful, immoral, illegal,
or impossible act is void ab initio

All agreements are contracts if they are made with:

(i) Free consent of the parties,

(ii) Competent to contract,

(iii) For a lawful consideration and with a lawful object,
and
(iv) Not expressly declared to be void. [Section 10]

Ten essential elements involved in a valid contract:

1.

Agreement, includes
(i) Offer and Acceptance
(ii) Offeror and Offeree, and
(iii)Consensus-ad-idem

2.

Intention to create legal relationship

3.

Free and genuine consent; i.e. Without

(i) Misrepresentation
(ii) Fraud
(iii)Undue Influence
(iv)Coercion
(v) Mistake (of Fact, or of Law)

Ten essential elements involved in a valid contract

(continued):

4. Parties should be competent to contract

i.e. They should be:

(i) Major
(ii) Of sound mind, and
(iii) Not disqualified from contracting by any law,
to which they are subject.
5. Lawful consideration
[i.e. the consideration (price), taken and given, by
the two parties, must not be for any unlawful
purpose].
6. Lawful Object

Ten essential elements involved in a valid contract

(continued):

7.

Agreements not declared void or illegal

8. Certainty of Meaning;
with No Ambiguity
9.

Possibility of performance

10. Necessary legal formalities must be

completed
[i.e. to be in writing, duly stamped, and/or registered,
if so required by law]

Classification of Contracts in terms of their validity or

enforceability in law
(i)

Valid agreements or contracts, i.e.

Not being voidable, void, illegal or unenforceable
in law

(ii)

Voidable agreements or contracts, i.e.

Which could be repudiated, but at the option and
will, only of aggrieved party [Section 2(i)]

(iii)

Void agreements or contracts, i.e.

Which are invalid, ab initio; and so is
unenforceable in law [Section 2(i)]
Remember: A contract with a minor is void ab
initio [Section 11]

Classification of Contracts in terms of their validity or

enforceability in law (continued):
(iv) Illegal agreements or contract; i.e.
Wherein the consideration and / or object is:

(a)
(b)
(c)
(d)
(e)

Forbidden by law, or
Defeats the provisions of any law, or
It is fraudulent, or
It involves or implies injury to the person or
property of another person, or
The court regards it as immoral or opposed to
public policy

Classification of Contracts in terms of their validity or

enforceability in law (continued):
(v)

Unenforceable agreements or contracts;

i.e.
(a) When it is not in writing, or
(b) Not duly stamped, and/or
(c) Not registered, as per law

Classification of Contracts in terms of their validity or

enforceability in law (continued):
(a)

Express Contracts, which are stated in words

(written or verbal), and

(b)

Implied Contracts, which are not stated in words

(written or verbal), but are inferred from the conduct
of the parties involved, or else from the
circumstances of the particular case [Section 9]

Classification of Contracts in terms of their performance

(a)

(i) Executed contract, which is fully completed by

both parties; nothing further remaining to be
done, and

(ii) Executory contract, where either all or some of

the terms of the contract, still remain to be
completed by both or any one of the parties
(b)

(i) Unilateral contract, where, while one of the

parties has already performed his obligation, the
other party remains to fulfil his obligation, and
(ii) Bilateral contract, where both the parties
remain to perform their obligations

An offer can be made in two distinct ways, viz.

1. By any act, which could be in the nature of,

Either
(i) Express Offer (i.e. in writing; like by letter,
telegram, fax, email, or advertisement, or else even
orally, either in person or over the telephone;
Or
(ii) Implied Offer (i.e. by conduct, or by implication)
2. By any omission, or abstinence (from doing something)
by the offeror [Section 3]

Specific Offer, which is made to a specific person,

or to a specific group of persons. It could be
accepted only by that specific person or by that
specific group of persons

General Offer, which is made to the general

public. Thus, it could be accepted by any one

Essential requirements for constituting a valid offer are:

(A)

Made with an intention of getting its acceptance

(B)

Made with the intention of creating a legal obligation

(C)

Must be definite, unambiguous and certain, or

capable of being made certain [Section 29]

(D)

Must not be
(i) Just a declaration of the intention to offer, or
(ii) Merely an invitation to offer

(E)

Must be communicated by the offeror to the offeree

Essential requirements for constituting a valid offer

(continued):
(F)

Should not contain a term, like, the non-compliance

of such term may amount to the assumption that it
has been accepted

(G)

A tender, in response to a notice or advertisement, is

an offer. Two types of Tender; viz.
(i)
(ii)

A specific or definite tender, and

A standing tender

(H)

Any Special Terms of an Offer must be brought to

the notice of the offeree

(I)

It should not amount to a Cross Offer

An offer may expire or lapse

(i)

After a stipulated time, or even after a reasonable time

[Section 6(2)]

(ii)

With the death or insanity, either of the offeror or the offeree,

before acceptance [Section 69 (4)]

(iii)

When the offeree rejects it

(iv)

When it is revoked by the offeror himself, well before its

acceptance

(v)

When not accepted in specifically prescribed mode;

Or in some usual and reasonable manner

(vi)

A conditional offer gets terminated when the offeree does not

accept its condition

(vii)

When the offeree makes a Counter Offer

An offer may be accepted:

1.

Expressly (i.e. verbally or in writing) or

2.

By implication

Essential ingredients of a valid acceptance:

1.

Must be absolute and unqualified [Section 7]. But,

mere variation in the language is immaterial

2.

Acceptance with implied conditions is valid

3.

Acceptance subject to a contract, or subject to a

formal contract, or
subject to a contract to be
approved by his lawyer, is valid

4.

Acceptance must be communicated to the offeror,

expressly or impliedly. But not by mere silence, or lack
of response, unless agreed to this effect. But, in the
case of a general offer, a specific communication is not
necessary. Performance, of its terms and conditions, is
sufficient

Essential ingredients of a valid acceptance

(continued):
5.

Acceptance must be given within the specified time, or

within a reasonable time

6.

Acceptance must be given in response to an offer

(No Offer: No Acceptance)

7.

Acceptance must be made before the offer lapses, or

gets terminated, revoked or withdrawn by the offeror

8.

The acceptance must be given only by the specific person

9.

To agree in the future is not permitted

Essential ingredients of a valid acceptance:

(continued):

10.

An offer, its acceptance, and its revocation, must be

communicated

11.

Communication of an offer is complete

(a) When it comes to the knowledge of the specific
offeree [Section 4]

(b) As against the offeror, when it is put in the course

of transmission, so as to be out of the power of the
acceptor
(c)

As against the acceptor, when it comes to the

knowledge of the offeror

Similar is the position in the case of Revocation also

Time of Revocation:

1.

Offer may be revoked any time, before the

communication of its acceptance is complete, as
against the offeror [Section 5]

2.

Similarly, acceptance may be revoked at any time,

before the communication of its acceptance is
complete, as against the acceptor

Who are competent to Contract?

Every person, who is

(i)

of the age of majority (i.e. not being a minor)

(ii)

of sound mind (i.e. not mentally incompetent) and

(iii) not disqualified from contracting [Section 11]

Who is a Minor?
A person is a Minor, who has:
Not completed 18 years of age, or
21 years of age

(i) Where a guardian of minors person or property is

appointed under the Guardians and Wards Act,
1890, Or
(i) Where a Court of Wards assumes superintendence
of minors property

Contract with or by a minor is void, ab initio

(not just voidable)

Minor may not return or refund any benefits,

received even under a void contract
A minor can be a promisee or a beneficiary
The minor, even on his attaining the majority, cannot
ratify his old agreement
A minor can always take the plea of being a minor

A minor cannot become a partner in any

partnership firm. However, he may be admitted to
the benefits of an already existing firm
Minors estate is liable to a person who supplies the
necessaries of life to him
Guardians and parents of a minor are not liable to
the creditor(s) of a minor, for any breach of contract
by the minor, even for the supply of the necessaries,
or otherwise
A minor can act as an agent, and bind the principal,
but not himself.

Position of contracts by the persons of

mental incompetence
Person who is usually of unsound mind, but occasionally of
sound mind, may make a contract when of sound mind
[Section 12]
Conversely speaking
A person who is usually of sound mind, but occasionally of
unsound mind, may not make a contract when of
unsound mind
Contracts by an idiot, (who is considered to be of an
unsound mind, permanently), is void, ab initio (like the
contract by a minor)
Liability for supplying the necessaries of life to a person
of unsound mind (i.e. lunatic, drunk person, or a person in
delirium, and an idiot), is the same as in the case of a minor
[Section 68]

Position of contracts by the persons of

mental incompetence
Like a minor, the person of unsound mind can be entitled
to the benefits, if any, under the contract

Incompetence through Status like:

1.
From political status
like alien enemies (and not alien friends)
2.
From corporate status
(i.e. ultra vires the Companys Memorandum of
Association)
3.
From legal status
(i.e. the persons, declared insolvents) till a certificate of
discharge (from insolvency) is issued
A married woman is competent to enter into a valid contract

(a)

Consent means that promisor and promisee must agree

to the same thing, and in the same sense, and at the
same time
(i.e. there must be consensus-ad-idem); and

(b)

Consent must be free

Free consent means that consent must not be obtained by

any one or more of the following:
(i)
(ii)
(iii)
(iv)
(v)

By
By
By
By
By

Coercion
Undue Influence
Fraud
Misrepresentation, and/or
Mistake

Otherwise, such contract would be voidable (not void), at

the option of that party, whose consent was so obtained

1. Coercion
comprises
(a) Committing, or threatening to commit, any act (against
Promissor or any other person) (by Promissee or any
other person) forbidden by Indian Penal Code (IPC), or
(b) Unlawfully detaining, or threatening to detain (Promissor
or any other person) (by Promissee or any other person)

(c) Threat to commit suicide is a crime, hence coercive.

Amount paid or things delivered, under coercion,

must be paid / delivered back

(a)Aggrieved party can set the contract aside, or

(b)He can insist on the performance of the contract

2. Undue Influence
Possible where one party dominates the mind and will of
the other, by using such position to obtain unfair advantage.
e.g. Doctor and patient, Parent and child, Guardian and
ward, Lawyer and client, Spiritual Guru and disciple, Trustee
and beneficiary. But, the charge of undue influence could be
refuted.

Undue influence cannot be presumed in the cases of:

Husband and wife

Master and servant
Landlord and tenant, and
Creditor and debtor
In such relationships, the aggrieved party has to prove
undue influence
But, in a prima facie case of undue influence, the alleged
party has to prove his innocence
The contract, induced by undue influence, is voidable, at
the option of the aggrieved party, and the same two
remedial options available in the case of coercion apply
here also.

Such agreement could be set-aside in part, if aggrieved

party, had received some benefits
Charging a higher rate of interest, in itself, may not be
sufficient

If rate of interest is exorbitantly high, Court may fix a

reasonably lower rate
The onus of proof of no use of undue influence is on the
creditor
More than ordinary care is required in case of
pardanashin lady

3. Fraud
(I) (a) The representation must be made
(b) It must be false, and
(c) It must be made knowingly, too

A mere silence would not amount to fraud

But it will
(a) Where relationship between the parties is of a
fiduciary nature (like father and son or daughter,
guardian and ward)
(b) Because, such relationships require utmost good
faith (like in the contract of insurance)

Further, silence is fraudulent, where silence, in

itself, is equivalent to speech

Besides, suppression of some relevant truth

(II)

The representation must pertain to a fact

(III)

The false statement must have been made:

(a) Knowingly, (i.e. with knowledge of it being false)
(b) Without belief in its truth; and
(c) Recklessly, without verify the truth

(IV)

With intention to induce other party to act thereupon

(V)

The statement must actually deceive

(VI)

Some loss must be suffered by the party by the fraud

Remedies Available to the Defrauded (Deceived) Party

(i) To avoid the performance of the contract, or

(ii) To insist performance, with the required changes, or

(iii) To claim damages for the fraud

Some Exceptions
(a) When the party had the means to verify and discover the
truth
(b) When the party had taken some benefit under the
contract, or he had affirmed the contract in some way or
the other

4. Misrepresentation

Though it also involves false statement, Element of

fraudulent intention is not involved, i.e. misrepresentation is
innocent and the person honestly believed it to be true.

Three Categories of Misrepresentation

(1)

The positive assertion, of that which is not true,

though he believes it to be true

(2)

Any breach of duty, without an intention to deceive,

gives an advantage to the person committing it

(3)

Causing, however innocently, a party to make a

mistake as to the substance of a thing, which
happens to be the subject matter of the agreement

Remedies Available to the Affected Party

To avoid performance of the contract, so made

But, not allowed, if the affected party had the means

of finding out the truth, by ordinary diligence
[The contract, obtained by fraud, can be avoided even in
such cases]

To insist performance of contract, with some required

changes

Remedies Available to the Affected Party

Unlike cases of fraud, claiming damages is not available

in such cases

Except:

(a)

In the cases of breach of warranty of authority of an

agent; and

(b)

In the cases of Negligent Representation

5. Mistake

Mistake pertains to an erroneous belief of something

Two types of Mistake

(i) Mistake of Fact (Bilateral and Unilateral), and
(ii) Mistake of Law

(I) (1) Bilateral Mistake

When both parties are under the mistake of fact, essential to the
agreement. Such agreement is void; not just voidable
Such mistakes may be regarding its:
(a) Existence; e.g. cow under the deal was already dead

(b) Identity; e.g. the car under sale was different than buyer
thought
(c) Title; e.g. both parties wrongly believed that seller had valid
title
(d)Quantity; e.g. the quantity, ordered by buyer, and thought by
seller, differed
(e) Price; e.g. Both parties have different notions about price of
goods.
But a wrong estimate about the price
does not amount to a bilateral mistake

(II) (2) Unilateral Mistake

When only one of the parties commits mistake

Contracts so made are valid, and not voidable

Three Exceptions where contract is voidable

Where the unilateral mistake pertains to:

Nature of the Contract (and not its terms)

Quality of the Contract, and
Identity of the Person, with whom the contract is being made

Mistake of Law (of own country, or of some foreign country)

Ignorance of law is no excuse is applicable only in cases of

home country

Accordingly, it is not applicable in the case of mistake of law of

some foreign country.
Such contract is treated only as a mistake of fact, and not of
law

The consideration is what promisor demands,

in return, as the price for his promise

It is based on principle of quid pro quo,

i.e. something in return

Consideration pertains to both positive act and

negative abstinence,

(a) To the past (i.e. already done or abstained from doing),

(b) To the present (i.e. being done or being abstained from
doing), and
(c) To the future (i.e. yet to be done or yet to be abstained
from doing).

An agreement made without consideration is void

It is based on the Principle:
No Consideration; No contract

Essential Ingredients of CONSIDERATION

(i) It should be at the desire of the promisor - not of any
third party
(ii)Consideration, refers to both (positive) act and
(negative) abstinence
(a) Pertaining to the past (i.e. already done or abstained from
doing)
(b) Pertaining to the present (i.e. being done or being abstained
from doing), and
(c) Pertaining to the future (i.e. yet to be done or yet to be
abstained from doing)

Essential Ingredients of CONSIDERATION

(iii) It must be real, and not worthless or illusory

It (Consideration / Price), however, need not be
adequate

(iv) It must not be a Pre-existing duty

(v) It may be either an act, or even abstinence
(vi) It must be lawful and real

Consideration and object are unlawful when:

Either is forbidden by law
Either is of such a nature that if permitted, it would
defeat the provisions of any law
Either is fraudulent
Either involves or implies injury to person or property
of another person
If Court regards either as immoral or opposed to
public policy

Exceptions to the Rule:

No Consideration; No Contract
Exception 1
Promise made out of natural love and affection,
between parties standing in a near relation to each other
(out of blood relation or by marriage), provided It is expressed in writing, and is duly registered as required
by law.
Exception 2
Promise to compensate for any past voluntary service(s)

Exceptions to the Rule:

No Consideration, No Contract
(Continued)

Exception 3

Promise to Pay a Time-Barred Debt, provided that 1. There is a clear and existing debt, of a certain amount;
actually enforceable, but for its becoming time-barred;

2. There must be an express (not implied) promise (to pay

the debt);
3. Further, promise to pay the time-barred debt,
and not just its acknowledgement.

Exceptions to the Rule:

No Consideration, No Contract
(Continued)

4. Promise must come from the originally indebted person.

5. Promise must be in writing, and duly signed by the
original borrower himself.
6. It could be prepared as a separate document, or by a
simple letter.

Exceptions to the Rule:

No Consideration, No Contract
(Continued)

Exception 4
In the case of a Completed Gift

Exception 5
In the case of Remission of Promise

Exception 6
In the case of Contract of Agency

Exception 7
In the case affecting a bailment

Some Exceptions to the Doctrine of

Privity of Contract
The doctrine of Privity of Contract, stipulates that:
A stranger to the contract may not sue the party to the
contract
Exceptions:
1. (a) Beneficiaries of a Trust
(b) Beneficiaries of an Implied Trust
2. In the case of a Family Settlement
(a)At the time of partition of the property of a joint Hindu family
(b)If daughter had agreed with father to maintain her mother,
provided fathers property was assigned to her, the mother
can file a suit, as and when required

Some Exceptions to the Doctrine of

Privity of Contract

(c) If the wife leaves her husbands house, due to some illtreatment, and the husband agrees with his father-in-law to
treat her well henceforth, failing which he would provide her
with monthly maintenance allowance, and a separate house,
the wife is entitled to sue her husband, if needed.

Some Exceptions to the Doctrine of

Privity of Contract (Continued)
3. In the case of a Contract of Marriage
If father of a minor girl had agreed to marry his daughter to
a person, and that person had later broken the contract, the
girl, on attaining her age of majority, can file a suit against
the person

4. In the case of Assignment of Rights

Where a person assigns (or transfers) his rights to some
other (third) person such third person (assignee), can
enforce such rights in his own name.e.g. Assignment of life
insurance policy to a bank, or the official assignee of an
insolvent person

Consideration and Object Distinguished:

Consideration pertains to the content (of
the agreement), i.e. giving something, and
receiving something, in return
Whereas
Object refers to the purpose, or
intended end-result thereof

Consideration and Object are considered

Unlawful:
(i)

If either is forbidden by law

i.e. An act or undertaking, which is unlawful, i.e.

(a)

When it is punishable under criminal law of the country,

or else

(b)

When it is prohibited by some other special legislation

Consideration and Object are considered

Unlawful:

(ii) If either is of such a nature that if permitted,

it would defeat the provisions of any law
(ii) If either is fraudulent
(iii) If either involves or implies injury to
the person or property of another person
(ii) If the Court regards either as immoral, and
(iii) If the Court regards either as opposed to public
policy

Some Heads of Agreements Opposed to Public

Policy:
1. Trading with alien (foreign) enemy
2. Trafficking (sale) in public offices and titles
3. Interference with the course of justice
(like in the functioning of the Courts)
4. Stifling criminal prosecution

5. But Maintenance and champerty are deemed to be valid,

except:
(i) Where the terms are unfair and unjust to the person
so helped, and
(ii) Where the motive is mala fide

Some Heads of Agreements Opposed to Public

Policy (Contd.)
6. Marriage brokerage agreements. But, the business of
marriage bureau is excluded, as it serves only as an
information centre

7. Creating an interest against duty,

8. Interfering with the parental and marital rights,
9. Restrictions on personal liberty, like to work as a slave
or as a bonded labour, for some payment
10. Creating monopolies
11. Alienation of land by depressed classes.
All the aforementioned agreements are against public
policy, and hence are void

A void agreement is considered, as if not made at all

It is void ab initio (that is, right from the very beginning)
The following agreements are void:
Made by incompetent parties,
Made without consideration, or with unlawful
consideration and/or object,
If against public policy, and so on

Following Agreements are Expressly Declared as Void:

1. Agreements in restraint of marriage [Section 26]
But, an agreement that an employee will not marry till a
certain age, or up to a certain period, while in service, is
not void but valid; as no restraint on marriage itself is
involved, - e.g. as the person can marry after leaving the
job
2. Agreement in restraint of trade [Section 27]

3. Agreement in restraint of legal proceedings

[Section 28]
4. Agreements void for uncertainty [Section 29]
i.e. when goods to be sold are not specified.
Except when the seller deals in one specified goods only

5. Agreement by way of wager [Section 30]

6. Agreements contingent on impossible event
[Section 36]
e.g. Shifting Taj Mahal from Agra to Lucknow
7. Agreements to do impossible act [Section 56]
e.g. Turning iron into gold by magic

Agreement to do something, or not to do

something, on the stipulated condition of
some event, collateral to such contract, taking
place or not taking place. is a contingent
contract [Section 31].

Enforcement of Contingent Contracts [Sections 32 to 36]

(a) Only after that event actually takes place.
Not enforceable if such future event becomes
impossible [Section 32] e.g. cow under sale is dead.
(b) Only after that event Not taking place, like becoming
impossible [Section 33].
(c) Where a contract is contingent upon the manner in
which a certain person will act at an uncertain and
unspecified future time. Here, the specific event will
become impossible when the specific person does
something, which makes it impossible for him to so act.
[Section 34]

(d) If it is dependent upon happening of some specific but

uncertain event, within a fixed stipulated time in future,
such contract will become void, if stipulated fixed time has
already expired, and specific event has not taken place,
or has become impossible [Section 35, paragraph 1].
(e) Where it is dependent upon the non-happening of a
specific but uncertain event within a specified time; that
contract may be enforced in law when the time so fixed
has expired and the specified event has not taken place,
or can now never take place [Section 35, paragraph 2].
(f) But a contingent agreement to do something or even not
doing anything, in the case of an impossible event
happening, whether such impossibility was known to the
parties, or even not known to them, at the time of
contract.

In Quasi Contract, though the obligations

is neither contractual nor tortuous (expressly
or impliedly), it is enforceable by being a tacit
contract.

Claim arising out of a quasi-contract is

generally for money.

Cases, deemed as Quasi-Contracts

(i) Claims for Supply of necessaries of life [Section 68].

(a)Supply of necessaries of life only, commensurate with
his condition in life,
(b)To a person who is incompetent to contract and
(c)To the persons who are bound to be supported
by the incapable person (e.g. his wife and minor
children).
(d)Compensation payable out of the property of the
incapable person. It involves no personal liability of
incompetent person. Thus, if there is no property of
incapable person No claim is payable for the supply
of necessaries.

(ii) Reimbursement of the person, who has paid the amount

payable by another person under law, and where such
payment is made to protect his own bona fide selfinterest [Section 69].

(iii) Obligation of a person enjoying benefits of non

gratuitous act or delivery of goods [Section 70] to
make due compensation to the other person for the
act done or the delivery made by him; or else to restore
the act done or return or the goods delivered by the other
party.

(iv) Responsibility of finder of goods

When a finder takes the lost goods into his personal
custody, an agreement impliedly takes place.
He is considered as a bailee.
Therefore, he must take as much care of the goods
as a man of ordinary prudence would take in case
of his own goods of similar value and volume
[Section 71].

(v) Liability of a person to whom money is paid, or

thing delivered by mistake or under coercion
[Section 72].
He is required to repay the money so received, or
return such goods.

Quantum Meruit

It means as much as merited or as much as earned.

Where one of the parties has performed some work,

but the other party has repudiated the contract, or
when it becomes impossible to complete `remaining
portion of the performance of the contract; the
party can claim remuneration for work already
performed.

It means carrying out of the respective obligations by the

parties

They must either perform, or offer to perform

Where the promisor offers to perform, at the proper time
and place, but the promisee refuses to accept the
performance, it is called tender or
an attempted performance
For Tender or an Offer of Performance to be valid:

(i) It must be unconditional

(ii) It must be made at a proper time and place
(iii) Promisee must be given a reasonable time and
opportunity to verify the quality and quantity of
goods being delivered

The following persons can perform the Promise

1. The Promisor himself [Section 40] e.g. when his
personal skill is required Thus, if he dies, the contract
ends
2. The agent of the Promisor, and

3. The legal representative(s) of the Promisor

A Contract need not be performed in following cases

1. Where parties mutually agree to change terms and
conditions of the original contract by a fresh one, or to
rescind or alter it [Section 62].
2. Where the promisee dispenses with, or remits, wholly or
in part, the performance of the promise, or extends the
time for such performance, or accepts any satisfaction for
it [Section 63].
3. Where the aggrieved party, in a voidable agreement,
rescinds the contract [Section 64].
4. Where the promisee neglects or refuses to allow the
promissor, reasonable facilities, to enable him to perform
his promise [Section 67].

Where two or more persons make a joint promise

`the promisee may ask any (one or more) of such

joint promisors to perform the whole of the promise.
[Section 43]

Release of one of Joint Promisors

It does not discharge the other joint promisors.
[Section 44]

Right of Contribution

1. Where one of the joint promissors performs, he can

compel all other joint promissors to contribute equally
with himself
2. If one or more of the joint promissors default, in making
such contributions, the remaining ones will bear the
resultant loss

Devolution of Joint Rights [Section 45]

1. Where a person promises to two or more persons
jointly, all the joint promisees can claim the
performance
2. After death of any of them, it belongs to their legal
representatives, jointly with the survivor or survivors
3. Even after the death of the survivors, the
representatives of all the promisees can claim
performance jointly
4. Thus, as against the liability of the joint promisors
being both joint and several, right of the joint
promisees, is only joint, and not several

Time, Place, and Manner of Performance

[Sections 46 to 50, and 55]

1. Where time of performance of contract is specified, and

promissor has agreed to perform without demand,
promissor must perform on such specified day/date. But,
during the usual business hours and at the specified
place
2. If time is not specified, performance must be made
within a reasonable time, varying from case to case
3. Where promissor has not agreed to perform without
application (i.e. demand) by promisee, promisee must
demand performance at a reasonable place, within usual
business hours

Time, Place, and Manner of Performance

[Sections 46 to 50, and 55]

4. If promissor has agreed to perform without demand, but

no place is fixed, promisor must request the promisee to
specify a reasonable place, and perform at such
specified place
5. Promise may be performed in any manner, or at any
time, which the promisee stipulates or specifies

Performance of Reciprocal Promises

[Section 51 to 54, and 57]

A reciprocal promise is where contract comprises

promise by one party (to do or not to do something
in the future), in consideration of a similar promise
by the other party

Three types of Reciprocal Promises

1. Mutual and Dependent
Where the performance by one party depends upon the
prior performance by the other party

2. Mutual and Independent

Here, each party must perform his part, without waiting
for the performance, or readiness to perform, by the
other party
3. Mutual and Concurrent
Where both parties must perform simultaneously
(i.e. concurrently, at the same time)

But, if promisee is not ready and willing to perform

his part the promisor need not perform his part.
[Section 51]

Reciprocal promise to do some things, which are legal

and some others which are illegal [Section 57]. Here,
the first set the promise(s) constitutes a contract,
but the second set of the promise(s) is void.

Assignments of Contracts
It means transference of the rights under the contract. But,
only rights (and not the obligations or liabilities) under the
contract can be assigned.

Assignment of a contract is done in two ways

(i)

Assignment by operation of law e.g. in the event

of insolvency or death of the party to the contract. In
the case of insolvency Official Receiver or assignee
acquires the interest in the contract, as per the law.
In the case of the death of the party, legal
representative(s) of the deceased party acquire(s) the
interest in the contract, as per the law.

(ii) Assignment by an act of the parties, when parties

to the contract themselves assign the contract to
some other party or parties.

Rules of Assignment

(i)

Only the rights are assigned, and not the obligations or

liabilities.

(ii)

Rights and benefits under a contract can be assigned.

(iii) As per Section 3 of the Transfer of Property Act, an

actionable claim is a claim to any debt (except a
secured debt) or to any beneficial interest . whether
such claim or beneficial interest be existent, accruing,
conditional or contingent.

Examples of actionable claim

(i)

A debt pertaining to repayment of some amount of

money;

(ii) The interest of the buyer in the goods in a contract for

forward delivery, and so on.
Actionable claims can be assigned by a document in
writing. Moreover, notice of such assignment must
also be given to the debtor to make assignment valid.
[Section 130 of the Transfer of Property Act]

Appropriation of Payment [Sections 59 to 61]

If a person has taken more than one loans from
same person and makes some repayment to his
specific loan account(s) it must be deposited to
only such specified account(s).

 But, if no account is specified, Under the English

law, it is to be settled based on Claytons Case
Principles.
In India , position is different, but largely based
on Claytons Case Principles. with some
modifications.

Rule No. 1: Appropriation by the Debtor [Section 59]

Amount be appropriated according to debtors

specification.

Where account not specified; as per circumstances of the

case, by implication.

Rule No. 2: Appropriation by the Creditor

In the case of no specification or indication by circumstances;

At the discretion of the creditor. even towards time-barred
debt. But not to a disputed debt [Section 60].

Rule No. 3: Where neither of the two parties

appropriates [Section 61]

Amount will be appropriated in the discharge (or part

payment) of the debt in order of time. If two or more loans
given on same date, then Proportionately; among all such
accounts.

Exception to Rule No. 3: Case of Halletts Estate,

This rule applies in cases where the trustee mixes-up

trust funds with his own funds; where first withdrawal
by the trustee be debited to trustees own money; and
thereafter to that of the trust.

But, in the case of any deposit made by the trustee,

amount will be first credited to the account of the trust,
and thereafter to trustees account.

A Contract may be discharged

1. (a) By performance of contract, or

(b) By tender, i.e. where the promisor tenders
performance of his part, but the other party
refuses to accept it

A Contract may be discharged

2.

By mutual consent [Section 62] i.e.

(a) By Novation, i.e. substitution of original contract by a

new one (valid and enforceable). Such novation may
be between the same old parties, or even between
different parties
(b) By Rescission (or cancellation of all or some portion
of the contract) by mutual consent of both the parties
to the original contract (it comes to an end)
(c) By Alteration, with mutual consent. (Then the
original contract comes to an end)

A Contract may be discharged

(d) By Remission, i.e. by mutually agreeing to accept a

lesser amount, or settling for a lesser fulfillment of
promise, originally made
(e) By Waiver, i.e. by relinquishing the right by one
party; and thus, releasing the other party of his
obligations

(f) By Merger, where an inferior right coincides with a

superior right of the same person

A Contract may be discharged

3. By subsequent impossibility [Section 56]
either (i) inherent, or (ii) due to change of
circumstances
In such cases, the contract is:
(i) void ab initio, or
(ii) subsequently, respectively

Subsequent Impossibility may occur:

By destruction of the subject-mater of the contract
By death or disablement of the parties
By subsequent illegality
By declaration of war, between countries of two parties

By non-existence or non- occurrence of a particular

state of things, like the person agreeing to marry
becoming insane

Exceptions, i.e. where the performance does not become

absolutely impossible, but only difficult to perform, or it
becomes a financially losing proposition
(i)

Difficulty in performance
i.e. where one party may not earn as much as was
anticipated. Here, that party will have to perform,
despite a difficult business decision.

(ii) Commercial impossibility

Where incurring of some loss may be involved, if
contract is performed. But here performance is a must,
though it involves some loss.

Section 56, paragraph 3

Where a contract becomes void, any person who has received any advantage
under such contract must restore it to the other person [Section 65]

(iii)Non-performance by the third person or party

This does not discharge the promisor from his liability

(iv)Strikes, lockouts or civil disturbances

These do not terminate the contract, unless specified
otherwise

(v)Failure of one of the several objects

This does not terminate the contract

Section 56, paragraph 3

Where a contract becomes void, any person who has received any advantage
under such contract must restore it to the other person [Section 65]

A Contract may be discharged

4. By Operation of Law
(a) By Death of the promisor, where his personal skills
were required

(b) By Insolvency, i.e. where, after the order of

discharge is passed by an Insolvency Court, the
insolvent person consequently gets discharged of his
entire liabilities of all his debts incurred by him prior
to his adjudication
(c) By Merger, where, in the new contract, the security
of a higher value, etc. is taken

(d)By unauthorised alteration of terms of a written

document without the consent of the other party

A Contract may be discharged

5. By Breach of Contract, by way of
(a) Anticipatory Breach of Contract, where the party
repudiates it before the arrival of the time for the
performance,
or where the party, by his own act, disables himself from
performance

Consequences of Anticipatory Breach of Contract

(i) To rescind the contract and treat the contract as
terminated, and sue the promisor for damages, or
else
(ii)Not to rescind the contract, but to treat the contract
as operative, and wait for the arrival of the actual
time
In such a case, the party refusing to perform, still has a
chance of performing his part. But, if, in the mean time, the
contract gets legally discharged, the aggrieved party will
lose his right to sue for damages.

(b) Actual Breach of Contract

(i) Actual Breach of Contract, at the Time when

Performance is due. Such contract is voidable at the
option of the promisee; provided element of time was of
essence. But the promissor will be liable to compensate
the promisee. But if promisee agrees to postpone
performance, promisee cannot claim compensation for
loss unless promisee would have given a notice to the
promisor that he will claim compensation from him for
not acting at the originally agreed time.
(ii)Actual Breach of Contract during the Performance
of the Contract, i.e. when one party, fails to perform, or
refuses to perform, his part of obligation, during the
course of his performing the contract.

Remedies for Breach of Contract

1. Recession of the contract, whereby the aggrieved party is
freed from his obligations.
He can also claim compensation from the other party
for any loss or damage sustained
2. Claim damages for the losses, by way of:
(i) Ordinary damages,
i.e. difference between contract price and current market
price
(ii) Special damages, where there are certain special or
extraordinary circumstance involved, and their involvement
is communicated to the promisor

Remedies for Breach of Contract

(iii) Vindictive or punitive damages, or exemplary
damages, which involve not just damages to the promisee,
but also to inflict due punishment to the promisor, so as to
meet the ends of justice
(iv) Nominal damages, in case of only a technical
violation of legal rights, and where there is no substantial
loss caused to the aggrieved party

Remedies for Breach of Contract

(Continued)

3. Obtaining a decree for the specific performance,

where mere payment of damages is not considered
adequate. Court may direct the defaulting party to
perform his part.
Except in the following cases:
(a) Where monetary compensation is considered an
adequate relief
(b) Where the contract is of a personal nature, e.g. a
contract to marry
(c) Where it may not be possible for Court to supervise
the performance of the contract, e.g. a building
contract
(d) Where contract by a Company, falls beyond its
Memorandum of Association

Remedies for Breach of Contract

(Continued)

4. Getting an injunction, where a party does something,

which he had promised not to do.

Court may pass an injunction order, prohibiting such party

from doing so

5. Quantum Meruit (Already discussed)

It is a contract whereby one party promises to

save the other party from the loss caused to him
by the conduct of the promisor himself, or by any
other person [Section 124]. Losses caused by
death, disability, destruction by fire, flood,
cyclone, tsunami, etc., are also covered.

Essential Elements of Indemnity

(a) Some loss must be sustained by the promisee. If no loss is
sustained, promissor is not liable

(b) But, loss caused by the conduct of the promisee himself, is

not covered
A contract of indemnity may arise:

(a) By express agreement

e.g. indemnity bond to a bank, to issue duplicate draft or
(b)By operation of any law
e.g. Principal is bound by law to indemnify his agent;
Transferee of shares undertakes to indemnify the transferor

Rights of Indemnity Holder [Section 125]

(a)

To recover all damages sustained by him, and

(b)

To recover all costs of suits, paid to any third party.

However, the indemnifier (indemnifying party), does not

enjoy any legal rights, except those of the surety or
guarantor (under Section 141), viz. to get title to all the
benefits of securities, obtained by creditor from principal
debtor, whether he was aware of such securities or not

Commencement of Liabilities of the Indemnifier

Not to wait, until the indemnified party has actually

incurred the loss or damages, to be compensated for

So that he may meet his obligation under the indemnity,

without waiting for actually suffering loss, by way of
actual payment, out of his own funds, in a legal case

It is a contract to perform the promise, or to discharge

liability of a third person, in case of his (third persons)
default
Person giving guarantee is Surety
Person on whose behalf guarantee is given is
Principal Debtor, and
Person or party to whom the guarantee is given is
Creditor

Guarantee could be either written or verbal

Two sets of agreements:

(a) Principal contract between principal debtor and
creditor, and
(b) Secondary contract between the creditor and the
guarantor
In a contract of guarantee there are three parties, viz.
creditor, principal debtor, and guarantor

Contract of Indemnity Vs. Contract of Guarantee

Contract of Indemnity

In a contract of indemnity,; A tells B

If you lend 20 pound sterling to C, I
will see that your money comes
back.
In a contract of indemnity, there are
two parties; (indemnifier and
indemnified),
In a contract of indemnity, liability
of Promisor is primary and
independent.

Contract of Guarantee
In guarantee, A undertakes that
If you lend 20 pound sterling to
C, and he does not pay you, I will.
In the case of a contract of
guarantee there are three parties
(creditor, surety and principal
debtor).
In a contract of guarantee liability
of S Surety is only secondary; i.e.
he is liable only after principal
debtor refuses or fails to repay.

Contract of Indemnity Vs. Contract of Guarantee

Contract of Indemnity
In case of an indemnity, indemnifier
undertakes to indemnify the
promisee, if any loss gets caused,
and not otherwise.
In case of indemnity, the
indemnifier cannot file suit against
the third parties in his own name,
unless he is an assignee.

Contract of Guarantee
In case of a contract of guarantee,
there must be an already existing
debt/obligation the payment/
fulfillment, whereof is assured
(guaranteed) by the surety.
In case of a contract of guarantee,
the guarantor (surety), after
paying the debt of the principal
debtor, automatically enters into
the shoes of the creditor.
Accordingly, all securities obtained by
creditor, from principal debtor, get
transferred in his name. Besides, he can
proceed against the principal debtor in his
own name for recovery of the balance
amount, if any.

Types of Guarantees
(a)Specific Guarantee
(i) It pertains to a specific debt, and once it is repaid,
the guarantee automatically ends and gets
cancelled.
(ii) It is irrevocable, and even after his (guarantors)
death, his legal successors may have to honour the
commitment to the extent of the value of inherited
property.

Types of Guarantees
(b)Continuing Guarantee

(i) It pertains to a series of transactions; not just one.

(ii) It may be revoked, but regarding only future
transactions; not to transactions prior to the
revocation.
(iii)After the death of the surety, a continuing guarantee
gets revoked (unless there is a contract to the
contrary), but only in regard to the transactions
subsequent to the death, i.e. prior transactions will
be satisfied by his legal heirs, to the extent of the
inherited property of the deceased surety.

Rights & Duties of Creditors

(a)Rights
(i) To demand from surety, the repayment of loan
given to principal debtor, immediately after the
latter fails or refuses to make repayment when due,
even before exhausting all remedies available to
him against the principal debtor
(ii) Right of general lien on the securities of the
surety, but only after default or refusal by the
principal debtor.
(iii) If surety be declared insolvent, creditor can
proceed in the insolvency proceedings for his claims
(on pro rata basis)

(b) Duties [Obligations]

(i) Not to change term and conditions of the contract

with the principal debtor, without specific consent of
surety. Otherwise, surety automatically gets
discharged of all his future (not earlier) obligations.
(ii) Not to release or discharge the principal debtor;
which absolves surety of all his future (not earlier)
obligations.
(iii) Not to compound with, or give time to, or agree not
to sue, the principal debtor.
(iv) Not to do any act inconsistent with the rights of
surety, and which may impair the suretys eventual
remedy against the principal debtor.

Rights & Duties of Surety

(a) Rights against Creditor

To direct creditor to dismiss the employee, whose

honesty he had guaranteed, failing which, the surety is
discharged of his liabilities.

Rights & Duties of Surety

(Continued)

(b) Rights against Principal Debtor

(i) All rights with creditor against principal debtor get
invested in the surety, when he repays latters debt,
or when he himself performs the duty guaranteed.
(ii) If creditor loses, or parts with any of the securities,
without consent of surety; surety is discharged to
the extent of the value of such securities.
(iii)Surety has right to recover from the principal debtor,
the amount he has rightfully paid to the creditor.

Rights & Duties of Surety

(c)

(Continued)

Rights against Co-sureties

(i) Right of contribution amongst themselves, i.e. to

recover extra amount paid by him, from the
remaining co-sureties.
(ii) If one co-surety becomes insolvent, remaining cosureties will share the total liability equally amongst
them; but, only upto the extent of the specified
agreed guaranteed amounts.

Liabilities of Surety
(i)

It is co-extensive with that of the principal debtor

(ii) But, it is only a secondary or contingent liability,

i.e. it begins only after the principal debtor defaults or
refused to pay

(iii) Creditor is not required to first file a suit against the

principal debtor, and then alone to file a suit against
the guarantor(s). Creditor may not file suit against
principal debtor but only against guarantor(s); or both
as co-accused parties
(iv) Creditor is not required to first exhaust all remedies,
before filing suit against guarantor
(v) Creditor is not bound to give notice to the guarantor,
regarding the default, on the part of the principal
debtor

Position of the Surety in the case where the Principal

Debtor is a Minor
As liability of surety is co-extensive with that of
principal debtor, it cannot be more than that of
principal debtor.
Thus, as liability of minor is nil; the liability of surety,
too, is nil.

But, surety will be liable for having guaranteed a

minor debt, if it has been specifically provided in
guarantee document.

Discharge of Surety
(i)

By giving prior notice of revocation to the creditor,

but pertaining only to the future transactions. But, if
one co-surety revokes his guarantee, and the other
co-sureties do not do so, they will be held liable for
the repayment of the dues.

(ii) On death of surety, but pertaining only to future

transactions, and only in the absence of any other
contract to the contrary.

(iii) When creditor changes the terms and conditions of

the contract without prior specific consent of surety
(pertaining to transactions thereafter (and not earlier
ones).
(iv) When creditor releases or discharges the principal
debtor.

Discharge of Surety

(Continued)

(v) When creditor compounds, or gives time to, or agrees

not to sue the principal debtor, without suretys
consent. But, not so, if creditor enters into an
agreement with any third party to give some
extension of time to principal debtor.
(vi) When the creditors action or omission impairs
suretys eventual remedy against the principal debtor.
(vii)When creditor loses or parts with any of the
securities, without consent of surety, but only to the
extent of the value of such securities.

Bailment is the delivery of goods by one

person (known as the bailor), to another
person (known as the bailee), for some
purpose, upon a contract that the goods shall
be returned to bailor (or otherwise disposed of,
as per bailors direction) by the bailee,
immediately after the purpose for which the
goods were initially bailed, is accomplished
[Section 148]

Main Characteristics of Bailment

(a) Delivery of goods by way of actual delivery, or
constructive delivery of goods, already in possession of
the other person (bailee)
(b) Delivery of goods only; and not of currency notes, etc.
(c) Contract that goods will be returned to the bailor on
completion of the purpose for which it was bailed.

Exception:
But, the finder of lost goods, holds such goods as a bailee
on behalf the owner, though there is no contract between
them.
(d) Bailee must return the same specific bailed goods (in
specie).

Duties (obligations) of Bailor

(a) (i) To disclose known faults in the goods (Section
150), which may materially interfere with the use
of such goods, or may expose the bailee to some
extraordinary risks (e.g. defect in brake of a car)
(ii) In a non-gratuitous bailment, the bailor is liable for
damages for both known and unknown faults. In a
gratuitous bailment, the bailor is liable for
damages for only known faults

Duties (obligations) of Bailor

(b) Liability for breach of warranty
(i.e. authority to bail) [Section 164], i.e. where bailor
was not entitled:
(i) To make the bailment, or
(ii) To receive the goods back, or
(iii)To give direction in respect of the disposal of the
goods so bailed.
(c) (i) If gratuitous bailment, bailor must bear all necessary
expenses (i.e. both ordinary and extraordinary
expenses) incurred by the bailee [Section 158]
(ii) But if non-gratuitous bailment, bailor is liable only for
extra-ordinary expenses (and not the necessary
expenses)

Duties (obligations) of Bailee

(i) To take due care of the goods bailed [Section 151], that
is, to take as much care of the goods bailed to him as a
man of ordinary prudence would, under similar
circumstances, take in the case of his own goods of the
same bulk, quality and value as the goods bailed, unless
otherwise provided in any special contract. Thus, if bailee
has taken due care, he is not responsible for any loss,
destruction, deterioration or damage to the bailed goods
[Section 152]
(ii) Not to make any unauthorised use of the goods bailed
[Section 154]

Duties (obligations) of Bailee

(Continued)

(iii) Not to mix up bailors goods with his own [Sections

155 to 157]

(a) Where such mixed up goods can be separated or

divided, he is liable for expenses of separation or
division of the goods, and also for the damages so
caused, if any.
(b) Where such mixed up goods cannot be separated or
divided, he must compensate the bailor of the entire
loss suffered by the bailor.

Duties (obligations) of Bailee

(Continued)

(iv) To return the bailed goods [Section 160] to

bailor, or to deliver it as per bailors direction,
without demand, immediately after expiry of the
period, or on accomplishment of the purpose for
which these were bailed. Otherwise, the bailee will
be liable for any loss, destruction or deterioration of
the goods caused by such delay;
(v) To return any accretion (addition) to the bailed
goods [Section 163], in the absence of any
contract to the contrary (i.e. to return cow with calf
born to her).

Rights of Bailee
1. All duties/obligations of bailor, conversely speaking, will
become the rights of the other party, viz. the bailee, that
is,
(i) For claiming compensation for damages caused due to
the non-disclosure of the faults in the goods

(ii) For breach of the warranty and damages arising

thereby
(iii) To claim necessary expenses, if gratuitous bailment,
and only extra- ordinary expenses, if non-gratuitous
bailment

Rights of Bailee

(Continued)

2. Right of Lien (Sections 170 and 171)

Bailee enjoys right of particular lien, i.e. the right to retain
only goods in question, in his possession, till the other person
pays debt or claimed dues [Section 170]. Under Section
171, only certain categories of the bailees have right of
general lien, like bankers, factors, wharfingers, attorneys of
the High Courts, and the policy brokers.

3. Rights against wrongful deprivation or injury to

goods [Sections 180 and 181]
Where a third person wrongfully deprives the bailee of the use
or possession of the goods bailed to him, or causes any injury
to these goods, the bailee can use such remedies as the
owner of the goods would have for his own goods. In such
cases, either bailee or bailor can file a suit. The amount of
compensation realised is appropriately apportioned between
the bailor and the bailee as per their interests [Section 181].

Rights of Bailor
(a) To enforce all duties of a bailee.
(b) If gratuitous bailment, bailor can demand return of
goods bailed, even before expiry of stipulated period, or
accomplishment of purpose. But, if bailee acted by
believing that the bailment will be for the full period, the
bailee must be compensated by the bailor for all
expenses and losses to the bailee [Section 159].

Termination of Bailment
1. On expiry of the stipulated period.
2. On accomplishment of the particular purpose.
3. By the action of bailee, being inconsistent with the
conditions of the contract [Section 153].
4. Termination of a Gratuitous Bailment.
Here, the bailor can recall bailed goods, even prematurely
[Section 159]. But, he must compensate the bailee for
any loss (But, only in excess of the benefits derived by
gratuitous bailment).
5. Gratuitous Bailment terminates, on the death of either
party [Section 162].

Duties of Finder of Lost Goods

1. He is treated as a bailee of such goods. Accordingly,
he must discharge various responsibilities of a bailee,
like taking the required care of the goods, and so on.

2. He must make a reasonable effort to trace the real

owner, and return it to him. But, he is entitled to
reimbursement of expenses incurred by him in this
connection.

Rights of Finder of Lost Goods

1. To retain the goods till he is able to find the true
owner, and till he is duly compensated by the true
owner for his expenses for preserving and safe
keeping of the goods, and in tracing the true owner.
He, however, has no right to sue owner for such
recovery [Section 168].
2. If owner of the lost goods has announced some
reward, the finder is entitled to receive such reward
as well. Here, he can even sue the true owner, for
recovery of such reward, and he can retain such
goods pending receipt of the reward.

Rights of Finder of Lost Goods

(Continued)

2. He has right to sell the goods [Section 169]:

(i) Where true owner is not found, despite reasonable

effort, and goods so found are usually subject to sale
(ii) Where such goods are perishable in nature
(iii)Where true owner refuses to pay the reasonable
charges to the finder, on demand, provided such
charges amount to two thirds of the value of such
lost goods

Pledge is bailment of goods, by way of security, for

payment of a debt, or performance of a promise, against
some loans [Section 172]
Person who delivers the goods as security is pledgor or
pawner
Person to whom the goods are so delivered is pledgee
or pawnee

In pledge, only the possession is given to the pledgee;

the ownership still remains with the pledgor

Till the amount of loan is repaid, no other creditor, person

or authority, including the government, can take
possession of such goods
Bank of Bihar vs State of Bihar and Others (1971,
Comp. Case 591)
As the pledge is also a kind of bailment itself (but,
delivered as security against some loan), all other
provisions of law, pertaining to bailment, will likewise
equally apply in all the cases of pledge, too.

Main Characteristics of Pledge

These are similar to those of bailment, that is,
(a) Delivery of goods; it may be either actual or
constructive.
(b) Goods are delivered as pledge, as security against some
loan, and these goods must be returned to the pledgor,
on repayment of the loan amount in full, with interest
and other charges.
(c) The specific goods pledged, must be returned.

Duties of Pledgee (similar to those of Bailor)

(a) To take due care of the goods pledged

(b) Not to make any unauthorised use of the goods pledged

(c) Not to mix up the pledgors goods with his own, failing
which he must pay different types of damages where
such mixed up goods can be separated or not separated
(d) To return pledged goods or to deliver them as per
pledgors direction, without demand, immediately after
loan is repaid on demand, or when falling due.
Otherwise, pledgee must compensate pledgor for any
loss, destruction or deterioration of goods caused thereby
(e) To return any accretion (addition) to the bailed goods

Rights of a Pledgee [Section 176]

1. To sue pledgor, when he fails to repay his debt, or
defaults in completion of performance, as promised
2. To retain possession of goods pledged, as a collateral
security against the advance
3. To sell pledged goods after giving reasonable notice,
regarding the intended sale within a certain date, giving
an opportunity to the debtor to repay the loan, within
the stipulated time

Rights of a Pledgee [Section 176]

4. To sue the pledgor for recovery of the balance amount,
after the sale, or to return the surplus amount, if any
If pledged goods are sold without giving a reasonable
notice, such sale will be valid, but the pledgee must pay
damages to the pledgor.
Before the actual sale, the pledgor has the rights:
(i) To supervise the sale proceedings, to see to it that
the goods fetch a reasonable price; and,
(ii)To meet his obligation by way of a last chance. But
he must repay the entire dues on the loan amount,
and not at the lower settled price

Rights to Sue for Some Other Claims: e.g.

(a) For damages caused due to non-disclosure of faults,
defects and abnormal character, like explosive or fragile
nature of goods pledged
(b) For loss suffered due to defective title of the pledgor
(c) For expenses incurred to preserve goods pledged

(d) For injury to the goods pledged, or their deprivation by a

third party, his claim covers owners rights in full, and not
limited to his own interest (loan amount) alone
(e) Right of lien; of particular lien on pledged goods; and
also of general lien, for any other dues, but such
general lien, is available only for bankers, factors,
wharfingers, attorneys of High Courts, and policy brokers.
[Section 171]

Rights of a Pledgor
(a) To claim return of the pledged goods immediately,
after repayment of the entire dues, without making any
specific demand
(b) To receive reasonable notice of the pledgees
intention to sell the pledged goods, due to nonpayment of the entire dues, within the specified time.
Otherwise, the pledgor can claim damages for any loss
caused thereby. Such sale, without notice, however,
is held valid
(c) To receive surplus amount of the sale proceeds, if any,
left after the settlement of the entire dues

Rights of a Pledgor (Continued)

(d) To redeem his goods as a final opportunity before the
sale, but only against full repayment of the entire dues,
and not merely at the value of final sale deal
(e) To claim any addition or accrual arising to the pledged
goods, like dividend or bonus shares, calf born to the
pledged cow, etc.
(f) To claim damages, if the pledgee fails to take due care of
goods pledged

Duties/Obligations of a Pledgor
(a) To disclose material fault, extraordinary risks, or
explosive or fragile nature of the goods pledged, or else
to pay damages caused directly thereby, whether such
fault was known to the pledgor or not.
(b) Liability for any loss sustained by the pledgee,
due to any defect in pledgors title to the pledged
goods.
(c) To repay to the pledgee, any extra-ordinary expenses
(not necessary expenses), for preservation of the
pledged goods.

(d) To repay any shortfall still outstanding, after the sale of

the goods pledged.

Pledge by Non-owners
(a) Pledge by Mercantile Agent
(i) If goods are already in his possession and, with the
consent of the real owner, or by endorsement of
the document to title to goods, but only while
acting as a mercantile agent, in ordinary course of
business, (i.e. from his usual place of business,
during the usual business hours). It is presumed
that he has express authority from the owner to
pledge the goods.
(ii) Such pledge will be valid only if the pledgee
accepts such pledge in good faith, and not having
any notice that the mercantile agent did not have
the authority to pledge the goods. The onus of
proof of good faith, and having no notice of lack of
authority, is on the person or party, disputing the
validity of such pledge.

Pledge by Non-owners

(Continued)

(b) Pledge by the seller, in possession of the goods after the

sale, and by the buyer who obtains possession of the
goods with the consent of the seller, before the sale
thereof. But, pledgee must have acted in good faith,
and without notice of previous sale of the goods, or of
the sellers lien on the goods. [Section 30 of the Sale
of Goods Act 1930].
(c) Pledge by a person in possession of the goods under a
voidable contact, provided:
i.

Contract had not been rescinded by the person,

(having the option to do so) before the pledge; and

ii.

Pledgee had acted in good faith and without notice

of any defect in the title of the pledgor, in the
pledged goods.

Pledge by Non-owners

(Continued)

(d) Pledge by one of the many co-owners of the goods, if he

is in sole possession thereof, but with the consent of all
the remaining co-owners.
(e) Pledge by a person having limited interest, upto his own
interest therein. [Section 179].

Advantages of Pledge
(i) Goods pledged remain in actual and continued
possession and control of the creditor, and thus,
avoiding manipulation and/or misappropriation of the
pledged goods, or of pledging same goods to some
other creditor.
(ii) Security of pledge has priority over the charge of
hypothecation, though created earlier, provided the
pledgee had no knowledge thereof.
(iii) Pledgee can sell pledged goods, without intervention
and permission of Court, after giving a reasonable
notice to pledgor, regarding the intended sale.

Advantages of Pledge
(iv) If borrower becomes insolvent, the creditor can sell the
pledged goods and claim for the balance amount, still
due for payment. But, the pledgee must take all
possible precautions and safeguards before accepting
and storing the pledged goods, and also to exercise
continued vigilance and supervision over the pledged
goods, always.

Appendix 16.1:
Pledge, Hypothecation, and Mortgage: A Comparison

(i) Fixed (specific) vs Floating (fluid, fluctuating,

changing) Charge

In pledge, the charge is specific and fixed (on specific

goods. But, in hypothecation, it is a floating charge, i.e.
goods in the companys godown(s) or factory premises,
etc., or in transit, automatically get charged
(hypothecated) to the bank.

But, the moment these are taken out of the companys

godowns, factory premises, etc., and/or from the
possession of the company, such goods automatically get
released, out of the hypothecation charge.

(ii) Sale of Goods Pledged vs Hypothecated

Pledgee can sell the goods pledged, without prior
permission of Court, if the pledgor fails to pay the debt, in
time

But, only after giving a reasonable notice of such

intended sale.

Pledgor has the right to redeem [Section 177]

But, in hypothecated goods, prior specific written

order of a competent Court, is required

Sale of hypothecated goods, without the Court

permission, is possible, if the charge of hypothecation
is subsequently got converted into the charge of
pledge, by signing of a pledge letter, by the pledgor.

(iii) Priority of Pledge over Hypothecation

Charge of pledge, created after hypothecation, has
priority thereto, provided the pledgee did not now,
and did not have any notice of the prior charge of
hypothecation.

Registration of the Charge(s) of Hypothecation

Under Section 125 of the Companies Act, 1956, the
charge of hypothecation of stocks of inventories and book
debts is required to be registered with the Registrar of
Companies concerned.
Application and legal agreement documents, should be
`filed in the office of
Registrar of Companies concerned,
by the borrower or creditor, within 30 days, from the
date of the execution of the legal documents, on Form8, in triplicate.

Registration of the Charge(s) of Hypothecation

(Continued)

Application for modification or satisfaction of charge, however,

is submitted on Form-10 and Form-17, respectively, in
triplicate.
Under Section 126 of the Companies Act-1956, the date
of Notice of the Charge is the date of execution of the
agreement documents, for creation of the charge, for
computing the date and time of its registration.

Registration of the Charge(s) of Hypothecation

(Continued)

Priority between Charges of Hypothecation- Charge

created earlier, but filed for registration afterwards (But,
within 30 days): Such charge (executed earlier) will have
priority over the other; even if filed for registration
subsequently (But, within 30 days of the execution of the
agreement documents).
Therefore, banks, before granting any advance to a
Company, against charge of pledge or hypothecation,
undertake a thorough search in the office of the Registrar of
Companies, to ascertain, whether any of the goods, now
being charged to the bank, are already charged to some
other creditor(s).

Registration of the Charge(s) of Hypothecation

(Continued)

Further, after 30 days of submitting the application with

documents in the Office of Registrar of Companies, for
registration of charge, a second search is conducted in
Registrars office, to verify that no other prior charge on the
goods, already charged, have been registered subsequently,
but within 30 days of the banks charge.

Registration of the Charge(s) of Hypothecation

(Continued)

Registration is deemed to be a due public notice and thus,

any subsequent charge, on the goods concerned, even by
way of pledge, will not have any priority, over such
hypothecation charge.
Usually, formal recording in the office of the Registrar takes
some time. Therefore, banks must look into all other
documents filed with the Registrar of Companies, still lying
pending for registration.

Registration of the Charge(s) of Hypothecation

(Continued)

Only such documents need to be verified which are filed

upto one month after the execution of documents by bank.
This is so, because of one of the following two reasons:

i. Either, the documents (though got executed before the

bank) have not been registered with the Registrar of
Companies, within 30 days;
ii. Or, these documents have been executed, after the bank.
iii. Better, if banks will make searches in the office of the
Registrar of Companies, at regular half-yearly or yearly
intervals.

Registration of the Charge(s) of Hypothecation

(Continued)

Possession and Ownership

In pledge, the possession of goods pledged is with the

pledgee.
But, in hypothecation, the possession of goods remains
with the hypothecator.
However, the ownership of such goods remains with
pledger/hypothecator, in both the cases.

Distinction between
Pledge and Hypothecation vs. Mortgage

Charges of pledge and hypothecation are created in

respect of movable goods or items only (NOT in the
cases of immovable goods or items).

But, the charge of mortgage is created in regard to

immovable property (e.g. land and building, immovable
items of plants and machinery).

Mortgages are broadly of two types:

1. Registered Mortgage, and
2. Equitable Mortgage (by way of deposit of original title
deeds).

Why Equitable Mortgage?

(a) Because, stamp duty in equitable mortgage is

nominal, i.e. it is to be stampled as a simple
agreement, and not ad valorem (according to the
value, i.e. amount of the documents).

(b) Because, charge of equitable mortgage, is registered

with the Registrar of Companies, which, in itself, has
the effect of a public notice, as in the case of
hypothecation.

How is Equitable Mortgage created?

Directors of the Company, duly authorised by the
Companys resolution, to create equitable mortgage, come
to Bank Managers office.
They then actually hand over the title deed, in original, to
Branch Manager, stating that they hereby deliver the title
deed to the bank, on behalf of the company, with the
intention and purpose of creating equitable mortgage on
the same.
Thereupon, Bank Manager accepts title deed accordingly,
and keeps it in his personal custody, on behalf of the Bank.

How is Equitable Mortgage created?

Two witnesses, both necessarily being Bank Officers only,
stand as witnesses, and sign in the Branch Document
Register, along with the Bank Manager.
Title deed is delivered along with a title deed delivery letter,
so as to evidence, in writing, that the title deed was actually
delivered to the Bank Manager for the aforesaid purpose
(and not that it was left behind by mistake).
Moreover, a proforma letter, printed as Inland Letter, signed
by Directors, is also required to be posted later, per
Registered Post, evidencing free will of the Directors, in
signing and delivering title deed (not under coercion,
etc.)

Immovable Items of Machinery

As per Transfer of Property Act, all immovable property,
including immovable items of machinery, must be
mortgaged

Pledge and hypothecation is permitted only for movable

goods and movable items of machinery).
Machinery, embedded to earth, is immovable, if
removable only after digging the earth.
But, if its four iron frames/angles only are embedded to
earth, and the four legs of say, a lathe machine, are
tightened thereto, with nuts and bolts, easily removable,
the machine is considered as movable.

Primary and Collateral (Additional) Securities

Assets purchased out of the loan amount itself are

primary security (like inventories and sundry debtors,
financed by way of working capital loan; and fixed assets,
purchased out of term loan).

Any other additional securities, are known as collateral

(or additional) securities.

Primary and Collateral (Additional) Securities

Additional securities are obtained by way of:
i.

Third party guarantee, and/or

ii. Equitable mortgage of some fixed assets or immovable

properties, in addition to those purchased out of the term
loan; and/or
iii. By way of pledge/hypothecation of current assets,
already charged against working capital loans, by way of
the second charge thereon.

ranj
Doubts and
questions are
more than
welcome!

CS Rahul Jain
Chief Executive Partner
RANJ & Associates, Company Secretaries
Office :

Flat No. 404, Sai Sandhya Apartments

B/s Shanti TVS Showroom, Street No. 9
Himayath Nagar, Hyderabad-500029, India

Phone:
Email :
Web :

+91-40-6555 2655
consult@ranjcs.com
www.ranjcs.com